Financing Growth: More Than a Matter of Money

Jeff Gordon

Financing growth is more than a matter of grabbing readily available cash from obvious sources, such as banks or venture capitalists. Sometimes, you, the entrepreneur, think you need financing, but think again: Is that what you really need? Other times, when you're convinced that yes, it's the cash, stupid, that will enable my startup to handle the sudden deluge of orders (or my business plan to make it off the kitchen table, or my going-nowhere company to pursue the acquisition that will make it a star, or, or, or...), the questions are just as complex.

As an entrepreneur guiding your company to the next level, you're seeking more than just financing: You need an engine that will best enable the business to achieve its primary business goals. Frequently, that engine is financial, such as the bank's credit line or the venture capitalist's cash. But it isn't always. Sometimes, the right engine isn't monetary at all, but rather, for example, the individual with the expertise you lack and your company desperately needs.

all instances, your job as an entrepreneur is to choose the right engine. And doing that involves asking tough questions. The toughest is: Do I really need the money? If the answer to that one is yes, the others cascade easily: What type of financing, and from what type of provider? How much? And why? And what does going one route rather than another mean for my business, now and in the future, and especially as I consider how I eventually want to get out?

Juggling questions such as these has been central to my own entrepreneurial career over the past decade, as I've founded and built two companies. Image Communications Inc., which I began in 1986 after graduating from college, provides integrated marketing and interactive direct marketing (and Web sites), for corporate clients. Source Digital, launched three years later with a partner, customizes digital video servers, again for large organizations. In the past seven years, their combined annual revenue soared fifteen fold, to $15 million. Achieving increases of that magnitude has necessitated careful decisions about financing growth. Let me describe four junctures that I consider critical, and explain why I chose the "engine" I did.

Early-Growth Financing: To Be Or Not To Be?

Five and a half years after I started Image, the company had reached the point at which I realized I couldn't continue to do it all. While I could deftly create the product and develop business--I'm focused on business development--I knew I came up short dealing with back room tasks, such day-to-day finances and operations. The obvious answer was to hire a Chief Operating Officer, and I even had the means to do so. Waiting in the wings was an "angel" financier, Lori Larson. After running a $4 billion portfolio for a property-management firm and investing in real estate, Larson was ready for a new challenge. A half hour after we met, we knew we'd be business partners.

Considering Image at that stage in its development, however, I felt the best engine for its growth wasn't Larson's money, but the manager herself. She had the financial expertise that I lacked and that the company needed. When I decided against seeking financing--in this case, Larson's money--she and I agreed to an arrangement that would benefit both of us. She joined Image as a partner rather than an employee, for a minority equity stake in the company. This gave me, the founding entrepreneur, the trust level I needed to grow. Our agendas were aligned through equity participation.

Fast-Growth Financing: Debt or Equity?

When I brought Larson into Image, I was also facing a crisis of a different sort at Source Digital, the company I had co-founded. Then two years old, Source Digital was growing so fast that it couldn't keep up with the orders from the likes of behemoths such as Bell Atlantic. This time, the engine we needed was clearly financing. The company had to pay up front for the servers and other equipment that it would customize and then resell to clients.

Seeking financing, I went hat in hand to the usual providers. I spoke with about 20 banks, just as many venture capitalists, and an array of individuals. I hit a brick wall with the banks, which would lend only as much as I could provide as collateral. At the time, I didn't even own a house! Even if I had, I don't believe my equity in a typical house would have provided enough collateral to secure the amount we needed. The venture capitalists were more accommodating--but for a price I firmly believed was too high. They wanted a significant minority stake in Source Digital. That would have given them, I felt, a degree of control disproportionate to the contribution they would likely make. I also felt uneasy that our company would be just one of many in a VC's impersonal portfolio.

What to do? First, I decided that Source Digital needed debt rather than equity financing, specifically a line of credit. Second, I wanted "smart" money, which I define as money from a financier who knows where I'm headed, understands my markets and the stage my business is in. I'm a firm believer in not taking money for the sake of taking money. Enter Lori Larson, again, this time as our "angel" financier. She provided a $250,000 credit line, which we've exceeded by up to as much as $600,000 in one month. She understands us, and as a result, we can turn on a dime when opportunity knocks.

Future-Growth Financing: Internal or External?

These days, at both Image and Source Digital, we're concentrating on, as they say, "adding value" for customers. That means providing technology that is at least state-of-the-art. Better yet, we want proprietary offerings that set us apart from the competition. Last year, we got an opportunity to invest in two proprietary technologies for about $1 million, one for each company. There was no question that we would buy; the only issue was whether to finance the purchase or use our own funds. The answer to that one was easy. The engine we needed was sitting right in our coffers. It made sense to use our own cash, because we would be accountable only to ourselves for what we did with what we bought.

Going Public: Time for Equity Financing?

Although we at Image and Source Digital haven't yet taken equity financing, we aren't about to say there isn't a place for it. Because of the growth we've achieved, we are exploring the possibility of raising equity capital in the public market, and with that in mind, we'll be talking again to the venture capitalists. At that point, unlike that earlier stage when we merely needed credit to fund advance-equipment purchases, the VC's interests, I'm convinced, will be in sync with our own. In going public, we'll need access to the capital markets and the network of contacts necessary to reach those markets. This time, the VC will be the engine.

So in sifting through your own quandaries about where to turn for the financing your company needs to grow, keep in mind that what you're seeking is the engine, and not necessarily the funding. When the right engine is financing, remember that what you're after is smart money--money that comes from financiers whose interests are aligned with your own. And keep asking those questions: They're the guideposts that will ceaselessly point you in the right direction.

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